Financial Reporting and Professional Issues

Time allowed–3 hours

Maximum marks–100

[N.B. – The figures in the margin indicate full marks. Questions must be answered in English .Examiner will
take account of the quality of language and of the way in which the answers are presented. Separate
answer books should be used for each section. Different parts, if any, of the same question must be
answered in one place in order of sequence.]

Section I
Marks–50
Marks

1. (a) In order to be reliable, an entity’s financial statements should represent faithfully the
transactions and events that it has undertaken.
Required:
Explain what is meant by faithful representation and how it enhances reliability. 5
(b) On 1 April 2007, Atia Ltd. increased the operating capacity of its plant. Due to a lack of
liquid funds it was unable to buy the required plant which had a cost of Tk.35,000,000. On
the recommendation of the finance director, Aita entered into an agreement to lease the plant
from the manufacturer. The lease required four annual payments in advance of Tk.10,000,000
each commencing on 1 April 2007. The plant would have a useful life of four years and
would be scrapped at the end of this period. The finance director, believing the lease to be an
operating lease, commented that the agreement would improve the company’s return on
capital employed (compared to outright purchase of the plant).
Required:
(i) Discuss the validity of the finance director’s comment and describe how BAS 17 Leases
ensures that leases such as above are faithfully represented in an entity’s financial
statements. 4
(ii) Prepare extracts of Atia’s income statement and balance sheet for the year ended 30
September 2007 in respect of the rental agreement assuming:
(1) It is an operating lease 3
(2) It is a finance lease (use an implicit interest rate of 10% per annum). 4

2. (a) According to BAS 16, what are the measurement principles of Property, Plant and
Equipment? How they should be presented and disclosed in the balance sheet according to
this standard? 4
(b) On January 2008, Bunty Ltd. acquired production equipment in the amount of Tk.250,000.
The following further costs were incurred:
Delivery: Tk. 18,000
Installation; Tk. 24,500
General administrative cost Tk. 3,000

The installation and setting up period took 3 months, and a further amount of Tk.21,000 was
spent on costs directly related to bringing the asset to its working condition. The equipment
was ready for use on 1 April 2008.
Monthly managerial reports indicated that for the first 5 months, the production quantities
from this equipment resulted in an initial operating loss of Tk.15,000 because of small
quantities produced. The months thereafter show much more positive results.
The equipment has an estimated useful life of 14 years and a residual value of Tk.8,000.
Estimated dismantling cost amounts to Tk.12,500.

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What is the cost of the assets and what are the annual charges in the income statement related
to the consumption of the economic benefits embodied in the assets? 6
(c) A multinational with strong presence in consumer goods market in Bangladesh wants to value
its brand for incorporation in its financial statements. Prepare a memorandum for discussion
in its forthcoming board meeting indicating pros and cons of the issue. 5

3. (a) Discuss the key concepts in measuring inventories, and presentation and disclosure of
inventories according to BAS 2. 3
(b) Padma Ltd. purchased inventory in January 2006, for Tk.600,000. On December 31, the
inventory had an NRV of Tk.550,000. During 2007 Padma sold the inventory for Tk.620,000.
Based on the above, which of the following statements is true? Give your answer with
explanation for each statement. 5
(i) On December 31 2006, the Balance Sheet reported the inventory at Tk.600,000;
(ii) On December 31 2006, the Balance Sheet reported the inventory at Tk.620,000. Padma
reported a Tk.20,000 gain on its income statement;
(iii) For the year ended December 2006, Padma recognized a Tk.50,000 loss on its income
statement.
(c) In the valuation of inventories, sometimes NRV can be followed. Explain When and Why? 3

4. (a) Explain the post balance sheet events as defined in IAS 10. How post balance sheet events are
reported in the Balance Sheet? 3
(b) X company with a balance sheet date of 31 December has a foreign long-term liability that is
not covered by a foreign currency contract. The foreign currency amount was converted at the
closing rate on December 31, 2007, and is shown in the accounting records at Tk.2 million.
The local currency dropped significantly against US Dollar on 1 February, 2008. On this date,
management decided to hedge further exposure by taking out a foreign currency forward
exchange contract, which limited the eventual liability to Tk.4 million. If this situation were
to apply at the balance sheet date, it would result in the company’s liabilities exceeding the
fair value of the assets.

Do you think that it is a post balance sheet event? If yes, why? How you would report it in the
2007 Balance Sheet? 5

Section II
Marks–50

1. (a) “Many writers and journalists have pointed to the crisis facing contemporary auditing – one
that many may argue is critical to its long-term survival as a professional activity. Three key
interrelated issues are at the heart of this crisis: the quality of reported financial information,
the role of the auditor in respect to that quality, and the litigious risks and economic costs
associated with such a role. In particular, the crisis is strongly connected to the phenomenon
of the expectation gap – the dichotomy between what appears to be promised by the auditor
and what is actually delivered.”

Required:
Discuss the above observations in the context of future role of auditor. 8
(b) Distinguished between 8
(i) Management Audit and Performance Audit
(ii) Special Audit and Environment Audit

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2. Hussain & Co. and Menon & Co. have been appointed joint auditors of South West Bank Ltd. for
the year ending 31 December, 2007. Before commencement of the audit, the audit firms mutually
divided their audit works as follows:

Assets and Expenditure Hussain & Co.

Liabilities and Income Menon & Co.

Upon completion of the audit each noted some material audit qualification points which, however,
were strongly opposed by the other joint auditor.

(a) How, in the above situation, the auditors should frame their audit report? 4
(b) In a joint audit can a dissenting joint auditor prefer to issue separate audit report? 4
(c) How joint auditors can face a professional negligence suit? 4

3. (a) IFAC issued guidelines identifying circumstances when auditors’ independence may be
threatened against which it has also provided some suggestions as safeguards to practicing
accountants.
Do you think that those safeguards are practicable in Bangladesh? Explain. 6

(b) In the light of IFAC Code of Ethics for Professional Accountants in Business, you are required to:
(i) Name the broad categories of safeguards that may eliminate or reduce to an acceptable
level the threats faced by professional accountants in business. 2
(ii) State at least four such safeguards from each of the above categories. 4

4. (a) Is harmonization of accounting profession globally possible or desirable when different

countries are at different economic stages? 5
(b) It is often alleged by informed quarters that Bangladesh scores highly on the adoption of
international accounting and auditing standards but the situation on the application of those
standards, if not deplorable, is full of question marks. How do you explain the phenomenon and
what can be done for proper application of accounting and auditing standards in Bangladesh? 5

The End